Earnings, U.S. data lift FTSE to best week in 2 months

Top shares surged on Friday as a surprisingly strong U.S. employment report offered further proof of a healthier global economy, enabling the FTSE-100 to post its biggest weekly gain in two months.

The strong U.S. data added to earlier upbeat numbers on the British services sector and Chinese manufacturing, brightening the prospects for global demand for everything from restaurant meals to metals.

A string of solid results and more positive outlooks from British blue chips during the week has also encouraged investors into equities at a time of ultra-low bond yields.

London's blue chip index closed up 105 points, or 1.8 percent, at 5,901.07, its highest close since July and taking its gains for the week to nearly 3 percent.

Since the start of 2012, it has added 4.6 percent - more than double the current annual yield on benchmark 10-year gilts.

Overall, if America is looking brighter, then the market at the moment is certainly willing to see through euro zone problems, said Tim Rees, fund manager at Insight Investment, which has around 160 billion pounds ($250 billion) under management. I am inclined to see it run further.

The U.S. economy added 243,000 jobs in January, 62 percent more than the consensus forecast in a Reuters poll and diverting market focus from the euro zone, where Greece is yet to finalise a deal needed to avoid a messy default.

A soft reading on private sector employment earlier in the week coupled with the historical trend of below-forecast January numbers had left the market more positioned for a downside surprise, increasing the eventual impact of the strong release.

Yield-hungry investors snapped up shares in Old Mutual , pushing the stock 4 percent higher after the insurer promised a 1 billion pound special dividend from the proceeds of the sale of its Nordic business.

Fellow insurer Admiral Group rallied nearly 8 percent as the firm said it had extended its existing UK car insurance reinsurance partnerships until 2014, with the cost of its arrangements unchanged.

Shares in BT added 4 percent after the former telephone monopoly reported solid core earnings for the third quarter and lifted some of its full year forecasts.

That followed stronger outlooks earlier this week from other blue chips, including catalytic converters supplier Johnson Matthey and chip designer ARM .

Risks remain, however, not least the lack of a debt deal needed to save Greece from a disorderly default.

If Greece leaves the euro zone, UK equities could weaken by 5 percent, while the complete collapse of the bloc would slash valuations by 30 percent, according cross-asset modelling by the SunGard's APT system.

The recent strong gains in equities - which have seen the FTSE-100 claw back all of last year's losses in just five weeks - have also raised the spectre of a reversal.

The index has just reached overbought territory, with the 7-day relative strength indicator rising to 72. A reading above 70 can be a signal the market is heading for a correction, according to technical analysts.